Collecting at Debt Against a Dead Person

Collecting at Debt Against a Dead Person

On Behalf of | May 29, 2015 | Business

Almost without exception, there is a strict one year statute of limitations for bringing a claim against an estate which starts to run from the date of the death of the debtor regardless of whether you know about it. See, California Code of Civil Procedure Section 366.2. A short limitations period, while seen as beneficial to promote the prompt settlement of estates, can wreak havoc for a judgment creditor. Death alone does not render a debt uncollectible. It just means you need a competent creditor attorney in Los Angeles to navigate the probate process.

When a person dies, a designated person takes control over the dead person’s estate, to wind down their business and financial affairs. This occurs in probate. Probate usually only applies to assets owned or titled in the name of the deceased, and not when such assets are held in trust, or in joint tenancy with right of survivorship.

If everything is working perfectly, an estate is probated, the judgment creditor gets notice, files a timely claim and its debt is paid. However, there are a few situations where the creditor is at a distinct disadvantage. For example, if there is a surviving spouse, the spouse or domestic partner may inherit property without a formal estate administration under the Spousal Property Petition. See, California Probate Code Sections 13500, 13501 & 13560 et seq. If the estate is worth less than $150,000.00, it need not be probated. While neither of these two situations avoids the obligation to arrange for payment to creditors – don’t hold your breath. In fact, most creditors never hear about the debtor’s demise however, all the property acquired by the transferees in these two situations (spouse and/or heirs) can only be pursued within the strict one year deadline mentioned above.

Sometimes, property is placed in a trust, and a trust is usually revocable or irrevocable. The distinction has important creditor implications, including the right for a creditor to seek satisfaction of their debt from a deceased settlor’s (i.e., the former debtor) previously revocable trust.

If the trust was irrevocable, when the debtor dies the trust property is not subject to the creditor’s claims. However, if the trust was revocable, then after the debtor dies (and the trust becomes irrevocable), the trust property is subject to the creditor’s claim without any need for showing fraudulent intent or other means to undo the non-probate transfer. Nevertheless, the trust estate is only secondarily liable to creditors, depending upon the necessary showing of inadequacy.

What happens when a creditor never finds out that the debtor dies? With a trust, there is often no estate administration. Thus, it is problematic for the creditor to show that the probate estate is inadequate. Therefore, upon finding out that the debtor is deceased, a savvy creditor’s attorney will seek to open a probate on behalf of the creditor, and have someone appointed as a “special” administrator with the sole purpose to receive creditor’s claims and bind the estate in further legal proceedings. The individual will file and serve a claim in the deceased settlor’s estate administration, have the claim deemed rejected, and then commence litigation against the trustee without waiting for completion of the estate administration.

The benefit to this strategy is that upon compliance with the creditor claim requirements, the one year statute of limitations mentioned above is tolled, enabling the filing of a civil action to enforce the claim and liability against the trust (the creditor is still required to prove inadequacy of the probate estate). Yes, it sounds like a lot of work but keep in mind that a money judgment is no longer enforceable after the death of the debtor except through probate and the creditor’s claim process (with the exception of a judgment lien secured against specific real property which does not require a creditor’s claim if the creditor waives recourse against all other estate property). In other words? This is pretty much all you’ve got left before that judgment becomes a worthless piece of paper.

For more information on how to collect a judgment on a deceased individual, contact Los Angeles commercial collections attorney Ronald P. Slates today.